I.

The Classical Gold Standard

Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants, and debt is the money of slaves.

To understand the economic history of the twentieth century, we must first examine the monetary system that dominated at its inception. The classical gold standard era, from 1873 to 1914, represented the first time since antiquity that Western civilization was using the same monetary standard. And given European industrial and economic advancement over the rest of the world, by the end of the nineteenth century, the classical gold standard had arguably extended to the whole planet, as most of the world was now using gold as money, or gold-backed currencies, while only a few governments still clung to the silver standard and became increasingly marginalized economically, with the largest capital holders in their territories shifting to gold.

Why Gold?

But why did money concentrate in gold and silver, and then gold alone? The answer can be best understood with reference to these metals having the lowest growth rate of their stockpiles. A detailed study of monetary history shows that, at any time and place, whatever is used as money is whatever fungible, divisible, groupable, and transportable good happens to have the lowest stockpile growth rates. For instance, pre-industrial societies used seashells that were very hard to find. Societies that had not invented glass production used imported glass beads as money. Islands that had no limestone used limestone as money, because limestone could only be obtained at great risk and cost from other faraway islands, making their supply difficult to increase. Prisoners use cigarettes as money because they usually cannot be manufactured in prison, and getting new ones is difficult. As metallurgy began to spread, metals proved remarkably suited for serving as money, as they were fungible, divisible, groupable, and transportable. Iron, copper, silver, and gold had all been used as money, but over time, the first three metals gradually lost their monetary role to gold, the hardest-to-make monetary metal, because their supplies could be increased at rates faster than that of gold’s supply.

It is remarkable that the rise of the gold standard did not occur through the efforts of any conscious designer or government mandate. The majority of the world had dealt with gold, silver, and copper as money for centuries. There was no international treaty between governments that would give gold monetary primacy and mandate the demonetization of silver. Individual governments had usually sought to maintain the monetary role of silver alongside gold, but they were powerless to do so in the face of overwhelming monetary incentives shaped by technological reality. Gold kept growing in prominence, and governments’ regulations either facilitated its wider adoption to the benefit of their people, or impotently attempted to stymie its growth at the expense of their people’s economic well-being.

Whether it was through rational consideration leading people to abandon alternative moneys for gold or through the holders of these moneys bleeding wealth to supply inflation far faster than gold holders, the end result has been the same everywhere in the world: the vast majority of wealth was concentrated in the hands of the holders of the monetary good that was the hardest to produce and had the lowest liquid stockpile growth rate.

Gold is distinct from the three other monetary metals in that it is chemically stable and practically impossible to destroy. It is the only one of these metals that does not corrode, disintegrate, rust, or tarnish. This means that all the gold humanity has produced over thousands of years remains available today, used as gold. Whereas the other metals’ stockpiles are constantly disintegrating, gold’s stockpiles just continue to grow. This means that, at any given time, the liquid stockpiles of gold held by people worldwide are orders of magnitude larger than any year’s production. Da